Companies can choose to spend money on a variety of different areas. The amounts it choses to spend in these different areas is called the spending mix.

An analogy is with a chemical plant. The plant will have various inputs of raw materials, catalysts and energy. At some combination of these inputs the performance of the plant is optimised.

The same is true with a company. The company spends money on different functional areas. For an insurance company these might be distribution, commission, marketing, underwriting, administration and so on. It also decides on the prices it will charge for its products. There is some combination of these variables that will yield the highest return for the company.

The optimal spending mix can only be decided upon in combination with the company’s pricing strategy. As well as the absolute amount of spending it also includes the balance between spending for immediate results and spending on investments which will yield results later. Another important trade off is between fixed and marginal expenses.